Wage Rigidity in a Competitive Incomplete Contract Market

Posted: 19 Jan 1999

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Armin Falk

University of Bonn - Economic Science Area; briq - Institute on Behavior & Inequality

Abstract

Do employers and workers underbid prevailing wages if there is unemployment? Do employers take advantage of workers' underbidding by lowering wages? We hypothesize that under conditions of incomplete labor contracts, wage levels may positively affect workers' propensity to cooperate. This, in turn, may prevent firms from underbidding or accepting the underbidding of workers. Experimental double auctions conducted for the purpose of examining these hypotheses yield the following results: (i) Workers' underbidding is very frequent, but employers refuse to accept workers' low wage offers in markets with incomplete labor contracts. However, in the presence of complete labor contracts, employers accept and actively enforce wages close to the competitive level. (ii) Workers' effort is positively related to the wage level. Therefore, wage cutting is costly for the employer if workers have discretion over their effort level. This holds true even in the presence of explicit performance incentives.

JEL Classification: C99, J31

Suggested Citation

Fehr, Ernst and Falk, Armin, Wage Rigidity in a Competitive Incomplete Contract Market. Available at SSRN: https://ssrn.com/abstract=142475

Ernst Fehr (Contact Author)

University of Zurich - Department of Economics ( email )

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+41 1 634 4907 (Fax)

Armin Falk

University of Bonn - Economic Science Area ( email )

briq - Institute on Behavior & Inequality

Schaumburg-Lippe-Stra├če 5-9
Bonn, 53113
Germany

HOME PAGE: http://www.briq-institute.org/

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